Due-on-sale clause

Due-on-Sale Clause

In mortgages, a clause stating that the borrower must repay the entirety of the principal on the mortgage if he/she sells the property before the mortgage matures. This protects the lender from the risk that the borrower will sell the property, pocket the proceeds (or, worse, lose them in other investments), and then default on the mortgage. It further protects the lender from the risk that the borrower will transfer the mortgage to the new owner of the property when prevailing interest rates are higher than what the new owner would pay.

due-on-sale clause

A clause in almost all mortgage loans providing that the entire balance of the loan will be due and payable if the property is sold, even if all payments are current and there has never been a default; effectively destroyed former widespread ability to assume mortgages. The clause allows lenders to control their interest rate exposure in a rising market, so they are not left with a portfolio full of low-interest-rate loans in an era of high interest rates.It also allows lenders to fully investigate any purchaser and make independent underwriting decisions about that purchaser and whether to extend a loan or not. A due-on-sale clause is not enforceable against someone who inherits property from a relative and intends to live in that property as a principal residence.See also assumable loan.

Due-on-Sale Clause

A provision of a loan contract stipulating that if the property is sold the loan balance must be repaid.

Amortgage containing a due-on-sale clause is not assumable. This prevents a home seller from transferring responsibility for an existing loan to the buyer when the interest rate on the old loan is below the current market.

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